What Is Earnings Before Tax (EBT)?

Meaning and Definition:

EBT stands for Earnings Before Tax (EBT). It is the most important parameter to judge the worthiness of the company from the investor’s perspective. How does the investor care for differences in operating efficiencies among similar companies on account of extraneous, costs of depreciation and interest? What she or he cares about is what the company is finally earning directly out of its operations? This question is precisely answered by EBT.

In the same breadth and for the same reasons EBT ignores non-operating incomes the company may be earning in the form of interest and dividends from the investments it had made by way of deploying its surplus profits left over after meeting its operational requirements and paying dividends.

Descending from the top of the ‘Profit and Loss Account’, ‘Earnings Before Tax’ is the profit earned after incurring all operational expenses and the two non-operating costs, depreciation and interest.

We can also define it as EBDITA less Depreciation and Interest.

Moving upwards from the bottom of the ‘Profit and Loss Account’, EBT is ‘Profit Before Tax (PBT)’ less ‘Non-Operating Incomes’.

Formula:

EBT	=	Sales Revenues	−	All Expenses Including Depreciation and Interest but Excluding Tax and Appropriations
OR
EBT	=	EBDITA	−	(Depreciation + Interest)
			OR
EBT	=	PBT*	−	Non-Operating Income

Significance:

EBT is the most important metric I employ to assess the investment worthiness of a company. I also monitor the health of the companies I had already invested in, on a quarterly basis, fundamentally based on the EBT. My only question remains, “Is the company still earning the same EBT that had attracted me to make the investment in the first place?”

Example:

	M/s.Old & Conservative Ltd.	M/s.New & Extravagent Ltd.
Sales	1500.00	1520.00
All Costs & Expenses before Depreciation, Interest, Tax and Appropriations	800.00	810.00
EBDITA	700.00	710.00
EBDITA % to Sales	46.67%	46.71%
Depreciation	30.00	100.00
Earnings after Depreciation but Before Interest, Tax and Appropriations (EBITA)	670.00	610.00
EBITA % to Sales	44.67%	40.13%
Interest	0.10	70.00
Earnings after Depreciation and  Interest but Before, Tax and Appropriations (EBTA or EBT)	669.90	540.00
EBT	44.66%	35.53%
Non-Operating Income	300.00	150.00
Profit Before Tax (PBT)	969.90	690.00
PBT % to Sales	64.66%	45.39%
Corporate Income Tax	320.07	227.70
Net Profit or Profit After Tax (PAT)	349.83	312.30
PAT %	23.32%	20.55%
Dividends	104.95	93.69
Net Profits After Taxes and Appropriations (PAT&A)	244.88	218.61
PAT&A % to Sales	16.33%	14.38%

From the above example we can deduce that the ‘New & Extravagant’ company has unfavourable cost structures in the form of depreciation and interest and therefore its EBT is lower than the former and stands at 35.53% compared to the 44.66%. While I may not judge ‘New & Extravagant’ company harshly, still I would always prefer to invest in the ‘Old and Conservative’ company. 

Similarly, while a company having strong and recurring, non-operating income is very attractive point, still the company cannot be complacent and must continue to earn handsome EBT margins, so that it will be able to make more non-operating financial investments and earn even more non-operating incomes and free cash flows.

Conclusion:

In conclusion, EBT is very important profit measure, after EBDITA and EBITA that that displays the final operating profits of the company. I personally rely solely on EBT to assess the company for possible investment.

What is EBITA?

Meaning and Definition:

EBITA is profits measured at the second level from the top, after EBDITA. It is the profit after all

expenses and costs, including depreciation but before: 

• Interest,
• Corporate income tax and
•  Appropriations towards dividends, reserves, etc.·     

We can also define it as EBDITA less Depreciation.

Formula:

EBITA	=	Sales Revenues	−	All Expenses Including Depreciation but Excluding Interest, Tax and Appropriations
OR
EBITA	=	EBDITA	−	Depreciation

Significance:

EBITA measures profitability without considering the impact of finance cost, thereby draw proper comparison between companies of the peer group and draw correct conclusions about the operational efficiencies. Say, one company might have setup its plant entirely from own funds and hence bears zero interest costs while the other may have employed borrowed funds and therefore paying significant interest costs. Under such circumstances simply comparing the companies based on ultimate net profit, may lead to erroneous conclusions and EBITA helps through proper light.

Example:

	M/s.Old & Conservative Ltd.	M/s.New & Extravagant Ltd.
Sales	1500.00	1520.00
All Costs & Expenses before Depreciation, Interest, Tax and Appropriations	800.00	810.00
Depreciation	30.00	100.00
Earnings after Depreciation but Before Interest, Tax and Appropriations (EBITA)	670.00	610.00
EBITA % to Sales	44.67%	40.13%
Interest	0.10	70.00
Earnings after Depreciation and Interest but Before, Tax and Appropriations (EBTA or EBT)	669.90	540.00
EBT	44.66%	35.53%
Corporate Income Tax	221.07	178.20
Net Profit or Profit After Tax (PAT)	448.83	361.80
PAT %	29.92%	23.80%
Dividends	134.65	108.54
Net Profits After Taxes and Appropriations (PAT&A)	314.18	253.26
PAT&A % to Sales	20.95%	16.66%

From the above example it becomes evident that both the companies are having similar sales and core operational cost structures, with the EBDITA margins around 46%. However the Old & Conservative limited has no outstanding loans while the latter has borrowed funds to finance the venture. As a result while the former’s EBITA is 44.67%, the latter’s is just 40.13%. If the comparison had been made based on PAT margins one could have erroneously denounced the latter for operational inefficiencies, whereas in reality both have same core operational efficiencies, but the latter has the burden of debt that is not directly linked to its core operational efficiency.

Conclusion:

In conclusion, EBITA is an important profit measure, after EBDITA that helps investors and analysts make proper comparison and draw right conclusion about similar companies.